Corruption / Transparency

Constitutionality of $200 Billion “Backroom Tobacco Deal” Challenged

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Two Louisianians bring lawsuit to Supreme Court against government-tobacco cartel

NEW ORLEANS, La. – The Competitive Enterprise Institute has filed a new challenge with the U.S. Supreme Court against the $200 billion deal between major tobacco companies and 46 state attorneys general of 1998. CEI’s petition for two Louisianians and one Virginian, filed last week, comes after five years of litigation and alleges that the tobacco “Master Settlement Agreement” violates the constitutional provision against multi-state agreements that have not been approved by Congress.

“The tobacco settlement was hatched in a smoke-free backroom between tobacco companies and state attorneys general,” says Sam Kazman, CEI General Counsel. “The state AGs [by way of higher supply costs] imposed a massive national sales tax on cigarettes, without a single elected legislator at any level of government voting for it. This was a major power grab by state AGs at the expense of citizens.”

On account of the deal, major tobacco companies make annual payments to the states in perpetuity, with an estimated cost of over $200 billion over 25 years. Small tobacco companies, although never part of the lawsuits or the original settlement – even those not even in existence at the time – are also required to make escrow payments to the states.

CEI, a D.C.-based free market public policy organization, alleges that the MSA set up a “national government-tobacco cartel that harmed consumers and small businesses by increasing cigarette prices and restricting competition… an economic, political, and legal abomination backed by powerful vested interests and upheld by inadequate and destructive legal reasoning.”

CEI’s latest challenge to the settlement now focuses on the Constitution’s Compact Clause (Article I, Section 10):

“No State shall, without the Consent of Congress …enter into any Agreement or Compact with another State, or with a foreign Power ….”

The Compact Clause prevents states from collectively encroaching on federal power or from ganging up on the citizens of other states. The plaintiffs claim the tobacco settlement, a multi-state compact, violates that provision and sets “a dangerous precedent.” They also believe the deal to be a violation of anti-trust laws, since it creates “a national tobacco cartel,” with the ability raise prices and impede new competitors.

Of three plaintiffs, two are from Shreveport, Louisiana, and include the Tobacco Discount House and Mark Heacock, an individual smoker. The tobacco retailer is facing higher prices, which it then passes on to consumers, and it may not sell cigarettes from companies not in compliance with the MSA. Heacock is one of those consumers suffering from higher prices and an absence of choice, since non-MSA merchandise is subject to seizure as “contraband.”

Louisiana’s attorney general, Buddy Caldwell, is the sole defendant, since he is responsible for assuring that the state stays in compliance with the MSA. In his response to the appeal, he asserts that “non-participating manufacturers” are causing “and will continue to cause, smoking-related death and disease among citizens of the State of Louisiana, thereby exposing the State to tremendous associated heath care costs now and in the future.”

Not being burdened by the MSA, these manufacturers could stimulate “demand for their deadly product. Moreover, NPMs would be unlikely to be in a position to pay any judgment the States might obtain for the huge health care costs NPM products would impose on the States.”

Caldwell’s legal team are scheduled to present their opposition to the appeal on January 10th, but Kazman hopes to bring his case before the Supreme Court in early March of 2011.

Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy. He can be contacted at, and one can follow him on twitter.